Don't merit IMF downgrade; preparing for QE tapering: FM

At a time when rating agencies are raising doubts over US' financial stability, Finance Minister P Chidambaram is trying his best to dismiss negativity surrounding the Indian economy.

The International Monetary Fund recently lowered India’s growth forecast from 5.6 percent to a steep 3.8 percent. Chidambaram, however, believes India does not deserve this downgrade.
Quoting a wide array of macro positivity, Chidambaram says he is surprised by the downgrade.
“The Index of Industrial Production (IIP) has looked up atleast for the months of July and August, our exports are up. In the last three months, the trade deficit has narrowed. The rupee has also stabilised in the last five weeks. So, I do not see why the forecast should be lowered from what it was in July 2013,” he adds while maintaining his confidence on the 5.5 percent GDP growth for FY14. 
On how the country is bracing itself for the inevitable US Fed tapering, Chidambaram assures that preparations for the same are in full swing.
“A number of steps have been taken. If political, administrative, Reserve Bank, Department of Industrial Policy and Promotion (DIPP), Foreign Investment Promotion Board (FIPB), all come together, then we should have a sufficient cushion to withstand any spillover effects of tapering. But I think this time Ben Bernanke will be a little more careful, more calibrated and he will perhaps communicate his actions well in advance,” adds the FM. Below is the edited transcript of Chidambaram’s interview to CNBC-TV18. 

Q: To begin with, you made a very strong intervention at the International Monetary Fund (IMF) meetings regarding the reforms in the IMF quota system. What exactly was your argument?
A: I do not think I said anything strong. Maybe I was a little more forthright than others. We want the 14th review to be completed. It should have been completed at least a year ago and they promised that it will be done shortly after January 2013 and that the 15th review will start and the deadline for completing that is January 2014.
However, we are nowhere near completing the 14th review, nor starting the 15th review. Hence, I did express our anxiety and anguish that the quota reforms remain incomplete. But a number of other members also voiced the same view. Q: IMF has also cut India's growth rate drastically. What do you think has gone wrong in the last six months that made IMF cut its growth forecast? Have you given any clarification to the IMF on India's stance?
A: Through the committee I asked the fund what is the information they have gathered between July this year and September that we do not have, what is the information due to which they have drastically lowered the growth forecast from 5.6 percent to 3.8 percent.
I hope they give me an answer before I leave. However, I do not think there is any information which warrants such a drastic revision. The Index of Industrial Production (IIP) has looked up atleast for the months of July and August, our exports are up. In the last three months, the trade deficit has narrowed.
The rupee has also stabilised in the last five weeks. So, I do not see why the forecast should be lowered from what it was in July 2013. We are surprised that the forecast has been lowered, but some of the countries also express their concern about these lower forecasts and in the past I am told IMF projections have been very different from the final figures. Q: What gives you the confidence that India will be able to achieve a 5-5.5 percent growth this year considering the reforms that you have undertaken have not really borne fruit?
A: I can only go by advice. We have two principal set of advisors- the Reserve Bank of India (RBI) and the Prime Minister's Economic Advisory Council (PMEAC). Both of them say that growth will be over 5 percent and perhaps closer to 5.5 percent. Then, I look at numbers. We look at export numbers, IIP numbers.
We look at tax revenue collections and there is no indication of a slowdown there. While it is true that in the first quarter of 2013-14 growth slowed down to 4.4 percent, but unless there is a further slowdown, why should I lower it below 4.4 percent. It can only be upped from 4.4 percent. So, let’s wait to see what the second quarter brings and I am sure the second half of the year that is the third and fourth quarter will be much better than the first and second quarters. Q: Do you think India is prepared to face tapering if and when that happens in December or early next year?
A: Tapering will start. Ben Bernanke has hinted yet again that tapering will start. We are preparing for tapering. First of all we are shoring up our foreign exchange reserves. Since the FCNR (b) revised policy we announced we have had about USD 7.4 billion coming in. So, we are taking a number of steps to shore up foreign exchange reserves.
Secondly, we will enter into an agreement with Japan for a USD 50 billion swap arrangement. Thirdly, portfolio investment has brought in about USD 2 billion already. Furthermore, we are encouraging Oil Marketing Companies (OMC) to borrow abroad to finance purchases of oil.
We have liberalised External Commercial Borrowings (ECB) and that will bring in some money. There are a couple of telecom investments round the corner. One of them is already announced, the amount of USD 2 billion and that is likely to come by November or December. So a number of steps have been taken. Policy, administrative, Reserve Bank, Department of Industrial Policy and Promotion (DIPP), Foreign Investment Promotion Board (FIPB), if all of them come together, we should have a sufficient cushion to withstand any spillover effects of tapering. But I think this time Ben Bernanke will be a little more careful, more calibrated and he will perhaps communicate his actions well in advance. Q: Looking at our investments do you think the retail sector has taken a setback, because Walmart has decided to slowdown the expansion plans in India?
A: Walmart will be a speck in India's retail market. India's retail market is driven by millions of standalone stores. India's retail market has been strengthened by Indian retail chains. Why do we assume that Walmart will make a huge difference to India's retail market? Q: Do you expect that many of these investments will take shape in the next six months?
A: Investments are taking place in civil aviation, telecommunication, pharmaceutical, oil and gas sector and power. We have unblocked projects worth about USD 64 billion. Not all of them of course will come on-stream before the end of March, but some of them will come on-stream and many will come on-stream as the months roll by. All this means that we will reap the benefits of the decisions taken in the last seven or eight months over the next 12-24 months.